Japan at half-full and half-empty

TOKYO
— Hwang Boo Seok has no idea when Japan's recession will end. "I think it continues," she says in the office of her tiny consulting firm.

But like a lot of people in Japan, Ms. Hwang and her five employees aren't waiting around for the recovery's starting bell. Hwang expects profits of at least $416,000 this year - roughly 62 times what RichStone Ltd. made when she started it in 1996 to provide advice on geothermal energy exploration and other matters. Growth isn't drastic, she adds, but it is constant.

For many economists and investors, small and mid-size firms are where the action is in Japan's economy. Consider the performance of Fidelity Investments' Japan Small Companies Fund, which is up 156 percent compared with a year ago.

Other Japan funds have also racked up eye-popping growth rates. More broadly, the Tokyo Stock Exchange's benchmark Nikkei index is higher today than it has been in nearly two years. Some market watchers insist a recovery is well under way in the world's No. 2 economy.

Tadashi Nakamae, a notorious skeptic who runs his own economic research firm in Tokyo, recently told a luncheon meeting of reporters that "until some kind of financial crash [takes place], I don't think the economy will have a genuine recovery."

He says foreign investors are savvy enough not to put too much credence into Japan's stunning gross domestic product numbers for the first quarter of 1999 - which indicated an annualized growth rate of 7.9 percent - but Mr. Nakamae notes they have been buying an awful lot of Japanese stocks lately. "Most probably they will lose money later on," he adds dryly.

A much more optimistic economist, Richard Koo of the Nomura Research Institute, an affiliate of Japan's biggest securities firm, yesterday told a similar audience that the end is near for Japan's decade of stagnation and recession.

"We can come out of this mess maybe within a year or two," says Mr. Koo, who credits the Japanese government for finally doing what he has been suggesting for years: Spend, spend, spend, and worry about everything else later on.

Indeed, the government has spent hundreds of billions of dollars on "economic stimulus" in recent years, and analysts generally agree that this spending is the economy's main prop. Koo argues that Japan's fundamental problem is that so many assets here - everything from real estate to stocks to golf-club memberships - have collapsed in value. As a result, companies and individuals have been intent on clearing debt from their balance sheets.

That focus is why no one is terribly interested in borrowing money from Japan's banks, despite the negligible cost. "Japan, at the moment, has the lowest interest rates in the history of mankind," Koo notes.

People are indeed cleaning up their balance sheets, he says, and if the government can keep spending in the meantime, they will be ready to resume consuming and investing.

Skeptic Nakamae and others see disaster in this strategy, arguing that Japan's budget deficit - a byproduct of all the economic stimulus - is spiraling out of control. And without fundamental reform, they say, the economy cannot reinvent itself to compete with the rest of the world.

Still, Koo's restrained optimism seems to be carrying the day. A much-watched quarterly survey of business sentiment this month indicated a more confident mood. Housing starts and consumer spending have both shown improvement.

All told, government leaders from Prime Minister Keizo Obuchi on down are sounding more self-assured.

"The economy is a living thing, and as we go forward, another push may become necessary," Finance Minister Kiichi Miyazawa told a parliamentary committee this week, hinting that more fiscal stimulus is on the way. "We've made it this far, so I want to observe conditions and respond flexibly."

The government is increasingly worried about rising unemployment - this week a $400 billion jobs package is making its way through parliament - but to coldhearted economists the rising number of jobless is an indication that companies are streamlining.

Taking start-up risks

A tougher labor market is also prompting some people to take risks and innovate, contributing to rising growth rates at start-up companies. Hodaka Kitahara left an affiliate of a huge corporation to open his own firm four years ago.

Headquartered in a government-subsidized suite of offices for start-up companies - where Hwang's RichStone also is based - Mr. Kitahara started out with two co-workers and now employs two dozen people at Coolsite Inc., an Internet marketing and engineering firm. He expects sales this year to reach $1.25 million.

Wearing a suit and tie and taking notes with a Mont Blanc pen, Kitahara says he can't shirk the salaryman dress code and still make sales to big companies and government agencies. Even so, he says, "a company like this fits in with the trend of the times."